IEA spells it out - Big Oil must make the Great Transition

Big Oil doesn’t have a choice; either it gets serious about the necessary transition to low carbon energy or mounting public fear fuelled by the impacts of the deepening climate crisis will eventually force drastic change. That in essence is the upshot of the International Energy Agency’s newly published assessment of the global oil and gas industry’s current low carbon position and commitments and the critical role it must play if Paris Agreement global warming targets are ever to be achieved.

But the IEA warns that despite some limited successes, there are as yet “few signs of a major change in company investment spending”.

“For the group of companies analysed, aggregate annual capital expenditures for projects outside core oil and gas supply averaged under $2billion since 2015, less than 1% of the total capital expenditures by these companies.”

The IEA points out that a few leading individual companies spend around 5% on average on projects outside core oil and gas supply, with the largest outlays in solar PV and wind.

A much more significant change in overall capital allocation would be required to accelerate energy transitions regardless of how companies go about it.

But there is ambition. The agency notes that three Europe-headquartered companies have plans to step up their spending in new energy areas. Total intends to install 7GW of green generating capacity worldwide by 2025, Shell plans to spend nearly 10% of its capital expenditures on clean power by 2025, while Equinor sees itself devoting 15-20% of capital expenditure towards new energy by 2030. And one or two have dumped hydrocarbons entirely to go green, the most obvious being Orsted of Denmark, formerly known as Danish Oil and Natural Gas (DONG).

Renewable Energy creates 5 times more jobs than fossil fuels.

The IEA points out that “uncertainty about the future” is a key challenge facing the industry, but that this is “no reason for companies to wait and see” as they consider their strategic choices.

Those of us familiar with the upstream side of the business are all too aware of this penchant for heel dragging. It happens to be one of the reasons why the UK Oil & Gas Authority was launched in April 2015. As reported frequently of late on Energy Voice, minimising emissions from core production operations should be a first-order priority for all, whatever the transition pathway. While it is probably not the top priority of the UK industry, transition is now being taken seriously by Oil & Gas UK and other relevant bodies.

The IEA points out that there are “ample, cost-effective opportunities to bring down the emissions intensity of delivered oil and gas” by minimising flaring of associated gas and venting of CO2, tackling methane emissions, and integrating renewables and low-carbon electricity into new upstream and liquefied natural gas (LNG) developments.

“As of today, 15% of global energy-related GHG emissions come from the process of getting oil & gas out of the ground and to consumers,” says the IEA.

“Reducing methane leaks to the atmosphere is the single most important and cost-effective way for the industry to bring down these emissions.”

Little wonder Extinction Rebellion is upping the ante in Aberdeen. But the city is just one of a large number of production hubs worldwide. To this must be added the various refining hubs. Unless the industry responds universally, then protests will gradually spread elsewhere, potentially even to regimes politically less tolerant than the UK.

The IEA is unequivocal: “A commitment by oil & gas companies to provide clean fuels to the world’s consumers is critical to the prospects for reducing emissions.

“The companies, whether listed free-market like BP and Shell or national oil corporations like China National and Petrobras, “must step up investment in low-carbon hydrogen, biomethane and advanced biofuels, as these can deliver the energy system benefits of hydrocarbons without net carbon emissions”.

The report continues: “Within 10 years, these low-carbon fuels would need to account for around 15% of overall investment in fuel supply.”

The agency points out that Big Oil can also play a central role in helping to tackle emissions from some of the hardest-to-abate sectors.

A wind turbine converts wind into electricity and the largest one is 20 stories tall.

Biofuels and hydrogen have already been mentioned above. To this can be added the development of carbon capture, storage and utilisation (CCUS) and offshore wind.

“Scaling up these technologies and bringing down their costs will rely on large-scale engineering and project management capabilities, qualities that are a good match to those of large oil & gas companies,” claims the IEA, though offshore wind seems to have accomplished much of that without Big Oil big thinking.

Aside from growing pressure being exerted through protest movements, two further big levers on oil & gas are capital markets and the insurance sector.

The IEA reminds: “Over the past decade, climate-related shareholder resolutions, which commonly seek to improve disclosure or align the strategies of companies with a more sustainable pathway, have strongly increased while investor collaborations, such as the Climate Action 100+, increasingly seek to facilitate engagement on sustainability issues.

“Moreover, an increasing number of banks, pension funds, insurance companies, and institutional and private investors are limiting their exposure to certain types of fossil fuel projects: the primary focus has been on coal, but restrictions are increasingly seen on some oil & gas projects as well.”

Up until recently, dirty old King Coal has been the primary focus of such restrictive attentions, but a growing number of oil majors are experiencing pressure too.

Turning the spotlight on NOCs, the IEA warns “the stakes are high” for such companies as they “are charged with the stewardship” of national hydrocarbon resources, and for their host governments and societies that often rely heavily on the associated oil income.

That said, the agency acknowledges that changing energy dynamics have prompted a number of countries to renew their commitment to reform and to diversify their economies; also that fundamental changes to the development model in many major resource holders look unavoidable.

“Some leading NOCs are stepping up research efforts targeting models of resource development that are compatible with deep decarbonisation.”

The IEA has, I believe, produced an unusually accessible assessment of the challenge that faces Big Oil.

It concludes: “To reduce GHG emissions, the world needs an energy transformation of unprecedented scale and breadth, involving a wide range of clean fuels and low-carbon technologies.

“The oil & gas industry has global breadth and diversity, as well as huge potential in terms of technical and financial expertise, and management and financial resources.

prices for oil and natural gas, and a number of state and federal government incentives, including the Energy

“For the future of the oil & gas industry, and its relationship with the societies in which it operates, it is strategically critical to harness this potential to the global fight against climate change.”